127 3.1 Types of shares

Objectives

3. Demonstrate your understanding on the rights of a preference shareholder.

Introduction

There are two types of shares that a company can issue. These are ordinary shares and preference shares.

The definition of a share is found in Borland’s Trustee v Steel (1901) 1 Ch. 279. Farwell J. stated that

“ …The interest of the shareholder in the company measured by a sum of money, for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders”.

The meaning of “measured by a sum of money” refers to the nominal value of the share. “Liability” means a member has to pay for his shares. “Interest” refers to a shareholder’s rights to attend and vote at meetings. “Mutual covenants” refer to the contractual nature of a shareholder’s rights found in the articles of a company

By virtue of being a shareholder, a shareholder of a company does not own the assets of the company. The company, being a separate legal entity, owns its assets. The shareholder only has his shareholder’s rights that are stated in the articles of the company. Shares are personal property of the shareholder that can be sold, bought, mortgaged or bequeathed.

Section 98 of the Companies Act 1965 states that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles, and shall not be of the nature of immovable property.

Preference shares and ordinary shares may be issued as redeemable or irredeemable.

Apart from the above two types of shares, there may be other types of shares such as “Founders” or “Deferred” shares. This type of shares are popular in the past but is rarely issued nowadays. Founders or deferred shares are shares issued to the promoters or vendors of assets acquired by the company or their nominees. The main advantage of this type of shares is that they carry larger heavy voting rights. he holders of this type of shares usually do not receive any dividend until the dividends of all other types of shares have been paid in full. These shares ranked after the preference and ordinary shares and are entitled to sharing of the remaining profits during winding up.